Titan Scopes Out Future As a Heavy Lifter

Titan Scopes Out Future As a Heavy Lifter<@VM>Titan Corp.

Gene Ray

By Nick Wakeman

High-flying Titan Corp. of San Diego, which recently announced its biggest government-related information technology deal yet, is widely expected to make another deal within weeks.

The publicly traded company, which is snapping up Advanced Communications Systems Inc. of Fairfax, Va., in a $175 million stock transaction, is likely to fetch a smaller company in its next deal, industry sources said.

Because it is a stock deal, the ACS purchase improves the company's financial position and makes it possible to do more acquisitions, Gene Ray, Titan chairman, president and chief executive, said in a recent interview.

ACS brings Titan another $218 million in revenue and pushes Titan's annual revenue to the $650 million mark. More than $500 million of that revenue comes from government information technology and communications work.

Not counting ACS, Titan is projected to have more than $400 million in 1999.

"This deal meets all of our criteria for acquisitions, probably more precisely than any other deal," Ray said.

Fueling the company's ability to make acquisitions has been a soaring stock price bolstered by the success of the company's food pasteurization unit. Titan's price per share rocketed from $4.75 last March to $40.44 Dec. 29.

Ray, whose goal is to push Titan's government revenue into the $1 billion-plus range within the next three years, said acquisition targets are companies that do communications and information technology work for the Department of Defense and intelligence agencies.

Part of the impetus for boosting his government unit to the $1 billion-plus mark is survival, Ray said. "It is extremely difficult in today's defense environment to survive as a subcontractor."

With ACS, Titan can bid on more contracts in the $100 million and above range. And it positions the company to compete better with the likes of the $1 billion-plus players, such as Lockheed Martin Corp. of Bethesda, Md., Science Applications International Corp. of San Diego, and TRW Inc. of Cleveland, Ray said.

"ACS is bringing us a strong management, and we have strong management," Ray said. Plans call for ACS President and CEO George Robinson to become a member of Titan's board of directors, he said.

"The cultural fit between the two companies is pretty good," said Thomas Meagher, vice president of equity research for the investment banking firm BB&T Scott and Stringfellow in Vienna, Va.

The ACS acquisition is a "superlative" deal for Titan, said Mark Jordan, an analyst with the investment banking firm A.G. Edwards of St. Louis. "ACS is one of the best companies within that marketplace," he said.

ACS has had internal growth of 15 percent to 20 percent annually. "That is exceptional," Ray said. By contrast, Titan's internal growth has been in the 10 percent to 12 percent range, he said.

The ACS acquisition, which was announced Dec. 9 and is expected to close by mid-February, is Titan's third government-related IT acquisition. Last year, Titan picked up government contractors Atlantic Aerospace Electronics Corp., a defense technology company in Boston, and Systems Resources Corp., a systems integrator also in Boston. Terms of the two deals were not disclosed.

The company also made three other acquisitions in 1999 related to its three other commercial business units.

"Gene Ray has done a wonderful job of making all the elements of the business work," said Richard Knop, a partner in the investment banking firm, Boles, Knop & Co. in Middleburg, Va. "The public markets have been rewarding him, and they are clearly on a growth track."

Titan, which Ray founded in 1981, developed the electron beam technology used in food pasteurization while doing defense work in the Reagan era for the Star Wars program, Ray said. The technology can kill bacteria on poultry, hamburger and other foods.

Titan, which holds numerous patents on the technology, signed agreements in 1999 with several major food processors and plans eventually to spin out its food pasteurization unit, known as Titan Scan, into its own company, Ray said.

That same strategy is being pursued for Titan's other businesses: Titan Systems, its government defense IT unit; Cayenta.com, the e-commerce unit; and Titan Wireless, which provides commercial telephone and data connections.

ACS will become part of Titan Systems, Ray said. All of Titan's units are headquartered in San Diego, and the company has about 3,500 employees. ACS adds another 2,000 workers.

Titan filed documents Dec. 29 with the Securities and Exchange Commission for a public offering for Cayenta.com. Analysts also expect Titan Scan to go public in the next 12 months, with Titan Wireless going out sometime in 2001.

"Our strategy is to be a technology-based company that generates businesses," Ray said. "We have four core businesses plus an incubator for new businesses." The incubator is used to develop promising technologies and new businesses for commercial and government markets. For example, with the ACS acquisition, Titan is picking up a new miniaturization technology that Ray said he hopes may develop into another business unit. The technology, which can put tiny machines on silicon chips, has implications for a broad number of applications, he said.

The defense information technology and communications unit is Titan's largest business; it provides technical and engineering services for command and control systems, network systems and satellite ground terminals. Major customers are the Army, Air Force, Navy and defense intelligence agencies.

With the acquisition of ACS, Titan is picking up complementary skills and customers in communications, information systems and applied technologies. The Navy is ACS' biggest customer.

"They really are building a high-end, defense IT and communications business," said Jerry Grossman, a director at the investment banking firm, Houlihan Lokey Howard & Zukin of McLean, Va.

With its acquisitions and internal growth, Titan as a whole is expected to have its operating profits rise by 60 percent next year, Grossman said. "They have really been aggressive and determined," he said.

In 1998, Titan's operating profit was $28.2 million compared with $13.7 million in 1997. Figures for 1999 are not yet available.

Ironically, ACS got its start in 1988 when Titan acquired a company called Advanced Digital Systems that had a Navy small business contract. Titan could not keep the contract because it was not a small business, so a unit under George Robinson was spun off to run the contract, and ACS was born, Ray said.

"It is remarkable what they have done," he said. Business: Defense communications, information technology, wireless communications, electronic commerce and food pasteurization

Location: San Diego

Founded: 1981

Employees: 3,500

1998 Revenue: $303 million

1998 Earnings: $13.5 million

Ticker: TTN on the New York Stock Exchange

Web Site: www.titan.com

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